Advisers: Deduction reductions coming

Vast majority believe fiscal cliff solution will include hike in taxes; not fans of the plans, however

Financial advisers expect that Congress and the White House will reach a resolution on the fiscal cliff, but they also expect the agreement to include steeper taxes on the wealthy.

The issue has been top-of-mind ever since President Barack Obama won re-election this month. Indeed, tensions have risen in recent days as congressional members of both parties reportedly are strengthening their respective positions on entitlements and taxes.

Financial advisers will get their chance to chime in this week, as the Financial Services Institute is encouraging its 35,000 adviser members to reach out to lawmakers and urge them to reach a resolution, according to spokesman Chris Paulitz.

Nevertheless, advisers generally believe that the U.S. is on the right track to avert the fiscal cliff, which will bring about the expiration of the Bush-era tax cuts and take steep automatic cuts to spending if Congress doesn't come up with a deficit reduction plan.

The FSI surveyed 2,454 of its adviser members this month and found that 79% of them predict that lawmakers will reach a deal before Jan. 1.

Advisers also believe that such a plan will include some bad news for the wealthy, or at least those making $200,000 individually and families earning $250,000. Seventy-two percent of the surveyed advisers predicted not only higher marginal tax rates for those individuals but also curbs on deductions.

Not only did 70% of advisers believe that these higher-earners should not be taxed at a higher rate, but close to seven out of 10 think those higher taxes ultimately will hurt saving and investing. Though 58% of participants want to keep the capital gains tax at 15%, about three in 10 are amenable to an increase to 20%.

Nine out of 10 believe that any deal should include reforms for both the tax code and entitlement programs, such as Medicare.

“While [advisers] recognize the need for compromise and reforms in order to make our country financially sound, they also see how many of these significant changes will impact their clients' ability to save for retirement, pay for their children's education or care for aging parents,” FSI president Dale Brown said in a statement.

Still, others aren't convinced that Washington will act before the year-end deadline.

“We’re not that positive it’ll be taken care of by year end,” said Thomas Fross, partner at Fross and Fross Wealth Management.

As a preemptive move, he has recommended that some of their clients begin taking their long-term capital gains now at 15% instead of waiting until next year. Mr. Fross has also started looking at Roth conversions in situations where it makes sense for clients.

Investors are as nervous as they were back in 2008, and the firm has sent them white papers and videos to keep clients in the know on the fiscal cliff.

“We don’t have a lot of trust in Washington,” Mr. Fross added. “I think it’ll be resolved next year, and that it will come with higher taxes. So why not take advantage of historically low capital gains rates?"